Portfolio Rebalancing – Is the Conventional Wisdom Wrong?

John Robinson |

"At the other end of the spectrum is the founder of index fund powerhouse Vanguard Investments John Bogle. In a CNBC interview, Bogle said he never rebalances his investments." U.S. News & World Report

So many financial advisors today tout portfolio rebalancing as an important element of their value propositions. However, published academic research on the merits of this strategy is decidedly mixed with a number of papers finding that rebalancing, especially in retirement, may be harmful to long term portfolio sustainability and remaining balances for heirs.  Below are excerpts from a few such papers:

  1. Is Rebalancing in Retirement Necessary (Dr. John Spitzer and Dr. Sandeep Singh, Journal of Financial Planning, June 2007.) 

    "Withdrawing bonds first, over stocks, performs the best of all the methods, though the resulting stock-heavy portfolio may make some investors uneasy. This method also is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing leaves the smallest amount." 

    “While the wisdom of rebalancing in the accumulation phase of the life cycle is widely accepted, the wisdom does not appear to extend to the withdrawal phase.” 

    “Rebalance is shown to be the least effective harvesting method and Bonds First the best for maximizing PIBR [remaining balance].” 
  2.  Reducing Retirement Risk with a Rising Equity Glidepath (Dr. Wade Pfau and Michael E. Kitces. Journal of Financial Planning (2013) 

    "Results show, surprisingly, that rising equity glide paths in retirement—where the portfolio starts out conservative and becomes more aggressive through the retirement time horizon—have the potential to actually reduce both the probability of failure and the magnitude of failure for client portfolios.” 
  3. Rebalancing: A comprehensive reassessment (Dr. Michael Edesess, SSRN working paper)

    Buy-and-hold has attractive features, not least that it requires the minimal amount of trading and that it can provide both a cushion against concerns about the deepest risk, which a rebalancing strategy cannot provide, and a chance to “win the lottery” by lucking into extremely good returns. Rebalancing, on the other hand, may be superior for the investor for whom extreme upside scenarios have relatively low utility. 

When it comes to portfolio management count me squarely in the contrarian camp.  In fact, part of the reason I created Nest Egg Guru was to illustrate how maintaining a constant allocation during the withdrawal phase may be a sub-optimal solution. I also expressed this view in a U.S. News & World report article a couple of years ago for an article titled, Sometimes Rebalancing Does More Harm than Good.  Here is an excerpt from that piece -

“John H. Robinson, founder of Financial Planning Hawaii, has an unusual strategy that flies in the face of this advice so that retirees don't run the risk of outliving their savings. He suggests withdrawing savings from bonds first in retirement, which has the effect of tilting a retired investor's portfolio toward stocks over time. That strategy, he says, "is most apt to leave a larger remaining balance at the end of 30 years, while rebalancing [to a more conservative allocation] leaves the smallest amount."


John (“JR”) Robinson is the founder of Financial Planning Hawaii and a co-founder of software maker Nest Egg Guru.  He has published numerous peer-reviewed journal papers on a broad range of financial planning topics, including three award-winning papers on retirement income sustainability.  He was twice included on Investopedia’s list of the top 100 most influential financial advisors in the United States. Photo courtesy of Charles Schwab.